Question

I need detailed long answer, more than 1 page, with references.

True/ False - An unusually low stock price in management's eyes encourages management to take the company private in a management buyout

Identify an instance where management took a company private based on a low stock price valuation? Did the company remain private, and if so, why did it remain in private hands?

Answer 1

Answer: Based on Real Case Study of KLH Capital

Many owners envision selling their business to key managers as a path to retirement and liquidity. Selling to the management team allows owners to preserve the company’s legacy and reward key leaders with an extraordinary opportunity for equity ownership and wealth creation. However, most management teams do not have the personal financial resources to complete a purchase without requiring the sellers to take ongoing risk in the form of seller financing. That’s where KLH Capital comes in.

KLH Capital partners with management teams to acquire the business outright from owners versus over time in alternatives such as seller notes or ESOPs, allowing the owner to shift his or her risk outside of the business immediately. At the same time, KLH offers management teams significant ownership and equity incentives to wholly engage them in the company’s future progress. We combine management’s industry and operational expertise with our own to grow the company’s value further.   As partners with KLH, the management team receives support with strategies such as executing add-on acquisitions, prioritizing growth initiatives and implementing technology systems, all while ensuring the company has access to the capital it needs to execute its plans.

For example, in December 2013, KLH Capital worked with two young leaders at Atchafalaya Measurement, Inc (AMI) in their pursuit to buy the company from its founders. The transaction allowed the founders to successfully exit the business and pass the torch to two deserving leaders. Let’s take a closer look at the transaction.

SUMMARY

• Young, energetic management team
• Opportunity to buy the business, but lacked personal balance sheet to fund the deal
• Sought financing from a partner that would not usurp their vision for the company

INVESTMENT STRUCTURE

• Total transaction value of $15 million
• KLH provided 100% of the equity and arranged debt financing
• Post deal KLH owned 80% and management owned 20% of the company, with the ability to earn significantly more as the business grows

BUSINESS

Atchafalaya Measurement, Inc. (AMI), based in Scott, LA, is a multi-basin oil and gas services company providing customized measurement systems to onshore and offshore drilling operations across the United States. By strategically targeting high-growth regions of drilling activity and delivering premier service, AMI has experienced steady growth and an increasing recurring revenue stream.

PARTNERSHIP

As the founders of AMI prepared for retirement, they approached two key managers about their interest in buying the company. The young, energetic managers were ideally suited to take over as they had been increasingly responsible for the company’s performance. An internal sale to management was an opportunity for the founders to reward its key leaders, retain longstanding employees and create immediate liquidity for retirement. For the managers, the purchase was an extraordinary opportunity to turn their sweat equity into valuable equity ownership, so they presented a letter of intent to buy the business.

To complete the purchase, the managers needed to line up financing and soon learned that securing a loan on favorable terms would be challenging, especially if they did not plan to personally guarantee the loan. After looking into their alternatives, a private equity backed buyout was deemed the most attractive option. The team was not merely looking for capital, however. They wanted a collaborative partner that could help them make capital budgeting decisions, prioritize strategic growth initiatives and implement software to improve internal processes. More importantly, they needed a partner that would value their industry expertise and respect their vision for the business. After evaluating several firms, they selected KLH Capital to bring their transaction to fruition because of its breadth of experience, compatible culture and generous equity ownership offer.

Since completing the purchase, KLH Capital has supported the management team in a number of initiatives including expansion into a new territory and one tuck-in acquisition. KLH also assisted the company in recruiting a controller and CFO, as well as an industry veteran to join the board. Finally, KLH guided management through the evaluation and implementation of new accounting and mobile field ticketing systems. Working together, we continue to build upon the company’s history and increase its value.

The company remained in the private hands. It remained in private hands because the management buyout is supported by a private equity fund, the private equity will, given that there is a dedicated management team in place, likely pay an attractive price for the asset. While private equity funds may also participate in MBOs, their preference may be for MBIs, where the companies are run by managers they know rather than the incumbent management team.